City & Business: Media shares scream down the superhighway

MEDIA stocks of all types and widely varying quality - from newspapers to TV, from publishing to music, and from cable to telecommunications (now counted by some City analysts as 'media') - are booming; they've become the stock market's latest glamour sector. Some of the reasons are good, solid, fundamental ones and others not, but fashion always was driven more by the heart than the head.

First, recovery ought to bring a disproportionately large rise in advertising revenue, which tends to suffer much larger swings than the economy as a whole. This should lead to strong earnings growth for both TV and newspaper groups, all of which have significantly pared costs in the recession.

Second, the rules governing takeovers among TV companies and cross-media ownership have been or are in the process of being changed; a sector that was once resistant to takeover activity suddenly faces a deluge of it. TV is being transformed by a combination of technological and political change from a parochial, highly regulated, highly protected national industry into a global business. Media barons and politicians alike insist that British media companies will have to get larger if they are to survive on the international stage.

Third, the craze for multimedia mergers and link-ups in the US, bringing telecommunications and TV under one roof, is jumping the Atlantic. The same frenzy is expected to establish itself in Europe too - albeit in a slightly different form. The urge to merge seemed to reach a paroxysm of craziness in the US late on Friday evening, when Viacom agreed to buy Blockbuster in order to outbid Barry Diller's QVC in the dollars 10bn battle for Paramount.

Articles appear daily comparing the present multimedia revolution to the great technological upheavals of the past - the industrial revolution, the coming of the computer age and the microchip. Books are already being written on it; it's going to change our lives, exponents say.

There are still sceptics, but most City pundits and bankers seem completely sold on its investment attractions and opportunities. Last week MCI, one of the US's largest telephone companies and now 20 per cent owned by our own BT, announced plans to spend up to dollars 20bn over the next six years on a new information superhighway in the States - an advanced telecommunications network capable of transmitting huge amounts of data at high speed.

Even excluding these vast new investments by MCI and others, spending in the US on telecommunications equipment is expected to rise 6 per cent this year to dollars 24.5bn. The numbers in Britain are not as dramatic but no less impressive for all that (see opposite).

A number of Britain's fledgling cable TV and telecommunications companies (which are mainly American-owned) plan to take advantage of sky-high share valuations of media stocks this year and go for flotation. There's hardly an investment bank or securities firm not involved in the process, and it promises to be big business, creating a whole new stock market sector. Some of the newly listed companies may command market capitalisations that will put them within spitting distance of the FT- SE 100 share index - though that largely depends on regulators allowing a number of the big franchise holders to merge into a single stock market company. Even so, it's not bad for an industry that barely existed even 10 years ago. The lowest market capitalisation in the FT-SE is more than pounds 1.4bn. Cable operators are also planning to raise more than pounds 2bn of debt finance in the City this year.

Yes, it's easy to see why the stock market has fallen in love with media and telecommunications stocks, but how long can it last and isn't the multimedia revolution going to be more dream than reality? The shelf life of most glamour sectors is short; disillusionment soon sets in. Only two years ago, pharmaceutical stocks were everyone's favourite; just look at them now. Will media go the same way? Sooner or later the scales inevitably fall from investors' eyes, but the honeymoon is not over yet. Eventually investors will come to realise that the merger boom isn't going to yield the high level of benefit claimed. New markets and new ideas always offer a spectacular opportunity to make hay for the early bird, but it never lasts. Others arrive and with them in time come recklessness and overcapacity. But that's all a long way off. There are bound to be investment disasters and casualties aplenty along the way, but for the time being, the only way to go is up.